This article was written for subscribers last week. Because of the importance of the topic it was decided to post for the public.
Apr 24, 2019
If one offered investors a fat tail put option that never decays or expires, costs about -1% pa to carry, has no counter party risk & no chance of ever becoming worthless, there would be a line out the door. But when one explains that this option is physical gold… no interest.
– S. Mikhailovich
The above quote has been atop www.jsmineset.com for over 6 months now. Recently, several readers have asked “what does it mean and why has the quote remained for so long”? With financial markets bloated and ready to implode without notice, let’s look at this very important concept and then expand on it as you will see.
First, what is a “fat tailed put”? A put option is something speculators use to bet on downward movement, or hedgers use to protect long positions. In this instance, the “put” happens to be against the financial system as a whole. In other words, a put, or a bet/hedge against a systemic implosion. A “fat tail” refers to something that begins to move exponentially the higher the sigma event becomes. The worse the event, the greater the move higher of a fat tailed put in far greater magnitude. Ultimately in a credit meltdown, owning gold will be the equivalent of owning “all the marbles”!